Slump raises fears of SA re­ces­sion

Lesotho Times - - Business -

JOHANNESBURG — South Africa’s econ­omy shrank in the sec­ond quar­ter, rais­ing the risk of a re­ces­sion in Africa’s most in­dus­tri­alised na­tion.

Gross do­mes­tic prod­uct fell 1.3 per­cent quar­ter on quar­ter, far be­low an­a­lysts’ ex­pec­ta­tions, due to a sharper than pre­dicted slow­down in the min­ing and man­u­fac­tur­ing in­dus­tries.

The be­lea­guered min­ing sec­tor con­tracted 6.8 per­cent amid a fall in iron and coal pro­duc­tion, while man­u­fac­tur­ing out­put dropped 6.3 per­cent. The worst per­form­ing sec­tor was agri­cul­ture, which con­tracted more than 17 per cent.

“It shows the harm­ful ef­fects of load shed­ding [power out­ages], weak global de­mand and ris­ing costs,” said David Faulkner, economist at HSBC.

“It cer­tainly raises the pos­si­bil­ity of re­ces­sion . . . [although we] would have to see con­tin­ued down­ward mo­men­tum in some of the ma­jor sec­tors for that to hap­pen — in par­tic­u­lar min­ing and man­u­fac­tur­ing.”

The econ­omy grew 1.3 per­cent in the first three months of 2015. An econ­omy is deemed to be in re­ces­sion if it en­dures two con­sec­u­tive quar­ters of shrink­ing growth.

The bleak eco­nomic data came a day af­ter the rand slid to a fresh all-time in­tra-day low of R14 against the US dol­lar, as global mar­ket tur­bu­lence caused by the slide in Chi­nese eq­ui­ties bat­tered emerg­ing mar­ket cur­ren­cies.

Razia Khan, chief economist for Africa at Stan­dard Char­tered, said that while emerg­ing mar­kets cur­ren­cies have suf­fered as a group, the weaker than ex­pected GDP data “pro­vides a South Africa-spe­cific fac­tor to drive the rand weaker”.

She added: “Given the de­te­ri­o­ra­tion in the ex­ter­nal en­vi­ron­ment — at least as re­flected in mar­ket sen­ti­ment rather than real eco­nomic con­di­tions — this will com­pound South Africa’s prob­lems.”

The rand re­bounded 0.8 per­cent on Tues­day to R13, while South African bond yields dropped af­ter hit­ting a new high for the year on Mon­day of 8.6 per­cent.

Gov­ern­ments across Africa have been grap- pling with weak cur­ren­cies, while re­sourcerich na­tions such as Nige­ria, An­gola and Zam­bia have been fur­ther hit by the fall in oil and met­als prices.

The fear now is that fur­ther slow­down in China — Africa’s big­gest trad­ing part­ner and a key in­vestor on the con­ti­nent, par­tic­u­larly in in­fra­struc­ture projects — will ex­ac­er­bate the chal­lenges faced by gov­ern­ments.

South Africa, as the most ad­vanced African econ­omy and one of the most liq­uid and traded emerg­ing mar­kets, is also more ex­posed to global growth trends than many of its peers on the con­ti­nent.

But do­mes­tic is­sues have added to South Africa’s list of prob­lems, in­clud­ing power out­ages, elec­tric­ity tar­iff in­creases, ris­ing labour costs and weak con­sumer and in­vestor con­fi­dence. A quar­ter of the work­force is un­em­ployed and more than half of peo­ple un­der 25 years old. Widen­ing in­equal­ity has driven an in­crease in crime and vi­o­lent at­tacks on shop own­ers and labour­ers from poorer African coun­tries.

Pre­to­ria had hoped for growth of about two per­cent for the year, but the fig­ures are likely to lead to fur­ther down­grades in growth fore­casts.

The South African econ­omy grew 1.5 per­cent in 2014, its worst per­for­mance since the 2009 re­ces­sion.

“The gov­ern­ment, they are not help­ing,” said Phila Mkhize, a 26-year-old Johannesburg na­tive who wanted to train as a para­medic af­ter grad­u­at­ing from high school but couldn’t af­ford the cour­ses. Now he works as a se­cu­rity guard at one of the city’s many malls.

“It’s very hard these days to find a job,” he said.

The rand is only the most widely traded among African cur­ren­cies to take a tough beat­ing this year from in­vestors who are dump­ing risky as­sets around the world. Cur­ren­cies in coun­tries in­clud­ing Ghana, Zam­bia and Uganda have slumped by as much as 20% this year.

Com­pa­nies like Har­mony Gold Min­ing Co. Ltd. are re­assess­ing the life­spans of their mines as those head­winds run up against lower com­mod­ity prices. Elec­tric­ity costs have more than tripled be­tween 2008 and 2014, ac­cord­ing to the Cham­ber of Mines of South Africa, thanks to a lack of main­te­nance and up­dates to ag­ing in­fra­struc­ture.

With­out ur­gent re­forms, “you start talk­ing more straws on a camel’s back,” said Srini­vasan Venkatakr­ish­nan, Chief Ex­ec­u­tive of Johannesburg-based An­glogold Ashanti Ltd., the world’s No. 3 gold pro­ducer. Al­ready some min­ers, in­clud­ing Lon­min PLC, have said they may cut tens of thou­sands of jobs.

“Some­thing has to give,” said Johannesburg-based Citi economist Gina Schoe­man. “The cur­rent tra­jec­tory we’re on is sim­ply un­sus­tain­able.”

And yet pol­icy mak­ers have demon­strated lit­tle will to act.

The poor growth fig­ures make the co­nun­drum fac­ing South Africa’s cen­tral bank even more con­found­ing. The bank wants to raise in­ter­est rates to prop up the rand. But tight­en­ing credit could freeze up growth even fur­ther.

Pres­i­dent Ja­cob Zuma’s ad­min­is­tra­tion has demon­strated even deeper pol­icy paral­y­sis, econ­o­mists say. In the years since the global fi­nan­cial cri­sis, the gov­ern­ment did lit­tle to build up fi­nan­cial buf­fers. Ex­ter­nal debt has risen steadily, to about 40% of gross do­mes­tic prod­uct.

The World Bank last week urged the gov­ern­ment to cur­tail public wages and re­form labour laws, to re­as­sure in­vestors and free up cash to build new power plants. Fail­ing such moves, the bank warned South Africa could slip into a quag­mire of low growth and deep in­equal­ity.

“The im­por­tant thing now is to take ad­van­tage of time left and, crit­i­cally, to ad­dress the chal­lenges that the global eco­nomic en­vi­ron­ment is cre­at­ing,” said Ca­tri­ona Pur­field, the bank’s economist for South Africa.

— FT/WSJ

THE rand tum­bled to record lows on Mon­day amid con­cerns that com­mod­ity prices will con­tinue to fall as China’s econ­omy slows.

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